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FINANCIALIZATION
AND WORKER
PROSPERITY:
A BROKEN LINK
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ABOUT THE AUTHOR ACKNOWLEDGMENTS
Lenore Palladino is Senior Economist and Policy Counsel at We thank Susan R. Holmberg,
the Roosevelt Institute, where she brings expertise to Mike Konczal, J.W. Mason, and
Roosevelt’s work on inequality and finance. Lenore was most Mark Paul for their comments
recently Vice President for Policy and Campaigns at Demos, and insight. Roosevelt staff Nell
where she built Demos’s strategic campaigns department. Her Abernathy, Kendra Bozarth,
research and writing focus on financial reform, financial Rakeen Mabud, Katy Milani,
taxation, labor rights, and fiscal crises. Her publications have Jennifer R Miller, Marshall
appeared in The Nation, The New Republic, State Tax Notes, Steinbaum, Steph Sterling,
and other venues. Victoria Streker, and Alex
Tucciarone all contributed to
the project.
This paper explores the roots of corporate financialization for America’s large public
companies. The increased pressure from financial markets to keep share prices high and
avoid hostile takeovers means that the top job of corporate executives has shifted from
managing rising sales to managing rising share price. This leads not only to pressure to
keep wages from rising and keep investment costs low, but also to the fissured workplace
itself. The rise of shareholder primacy has meant that there is simply less available for
employee compensation, as profit must flow out to shareholders and creditors. The long-
term consequences for companies may be declines in skill level and difficulties in improving
the productivity of labor. The long-term consequences for employees include stagnant
wages. The increasing share of profit earned off of financial assets means that workers may
be needed less, as firms make money off of financial activity rather than their traditional
business. Finally, because executives have been transformed into shareholders themselves,
their incentive to prioritize share price over productivity growth is personal. The scale of
corporate profits going to financial uses debunks the claim that increased compensation for
employees is out of reach.
Numerous researchers document the rise of financial profit-making within NFCs and
examine its relationship with declining productive investment and declining labor market
outcomes. Others focus on the increase of capital market pressures and ethos of shareholder
value maximization. Krippner (2005), Lin et. al (2014), and L. Davis (2013) define corporate
financialization as the rising ratio of financial profit earned off of financial assets, relative to
business profits earned from the regular trade of the corporation. Other researchers, such as
Lazonick (2014) and Mason (2015), focus on the increase of unproductive stock repurchases
and dividend payments as a primary measure of the rise of shareholder maximization as
the modus operandi of the firm. This paper combines the two lenses on corporate activity to
follow the flows of profits into—and out of—the firm.
“Financial assets” in the NFC context refers to the holdings of cash and short-term
investments, current receivables, advances, and a miscellaneous category of “other”
financial assets. Financial asset holdings are not trivial: The Financial Times has
documented how, in 2015, NFC financial holdings topped $2 trillion for the first time,
outstripping the asset holdings of traditional Wall Street asset managers.2 Just 30 U.S.
companies have portfolios of cash, securities, and investments worth more than $1.2 trillion;
holdings of corporate debt and commercial paper are at a record $432 billion, as companies
avoided repatriating cash for tax purposes and instead looked for riskier investment
opportunities. The Financial Times noted that the fact that NFCs are “pumping excess
cash into bonds reinforces the depressing fact that many companies don’t see attractive
investment opportunities in their business lines, helping explain the lack of stronger
economic activity and mediocre wage gains for workers in recent years.”3
Before focusing entirely on the process of financialization within NFCs, it is useful to define
the term “financialization” as it pertains to the entire economy.4 The term is commonly
1
Defined by Abernathy et al. (2016), “Short-termism is a corporate philosophy that prioritizes immediate increases in share
price and payouts at the expense of long-term business investment and growth.”
2
See Financial Times, “Microsoft Shows How Corporate Cash Piles Blur Lines with Wall St,” September, 15, 2017.
3
See Financial Times, “Corporate Bondholders Heighten Market Risk,” September 14, 2017.
4
For a full discussion of the shifts in the financial sector and the impact of financialization on American culture, see Konczal
and Abernathy (2015).
5
See, for example, G. Davis (2011); Epstein (2005); and Palley (2007).
6
Palley (2008) argues that financialization may be culpable for the growth of income inequality in the United States,
and that the “defining feature of financialization in the U.S. has been the increase in the volume of debt.” Palley argues
further that “financialization is a particular form of neoliberalism. That means neoliberalism is the driving force behind
financialization and the latter cannot be understood without an understanding of the former.” (See also Lapavitsas (2013);
Dunhaupt (2014, p. 8) for a useful chart outlining the stylized facts in the two theoretical frameworks.)
7
Zeynap Ton describes a similar model in The Good Jobs Strategy, in which she examines specific firms and how their
investment in their workforce results in higher customer satisfaction, profit, and market share.
Beginning in the late 20th century, workers became the largest cost to cut in pursuit of
strong capital market valuation. Gerald Davis (2016) describes how highly conglomerated
firms that had been undervalued by the stock market were broken up through a wave of
hostile takeovers in the 1980s. As firms became more responsive to capital market pressures
and takeover threats, the labor accords of the postwar era became subject to rising cost
scrutiny. By the 1990s, maximizing shareholder value had become the dominant mode for
public corporations, driven by legal and regulatory shifts under the Reagan administration.
Lead firms (e.g. Nike) focused on brand value over production and spun off to global
suppliers, enabled by the rise of information and communication technologies (ICTs).
Large-scale layoffs and rising benefits insecurity ensued—American mainstays like Sara
Lee went from 154,000 to 10,000 employees in 10 years, and the computer and electronics
industry as a whole lost 750,000 jobs. Since creating shareholder value was at odds with
long-term, well-paid employment, employee cost-cutting became the norm and the labor
market as a whole was destabilized.
8
See The Vanishing American Corporation for a full description of the shifts in public corporations over the last
hundred years.
9
For a full discussion of the shifts in lead firm employment, see The Fissured Workplace.
10
Elsewhere in their analysis they discuss the drivers of increased corporate profits: a declining real interest rate, the price
of investment goods, and declining corporate taxes. They do not discuss declining bargaining power of labor.
“Given that dividend payments and investment did not increase much as a share of
value added (profits), firms used part of the increased flow of savings to repurchase
their shares and part of it to accumulate cash and other types of financial assets” (Chen,
Karabarbounis, and Neiman 2017, p. 37).
In the rest of this section, I will discuss the literature that extends this analysis to the
United States.
11
Krippner (2005) characterizes this as an activity-centric (versus an accumulation-centric) view of the economy. She
compares the “pictures” of the economy that emerge from the different viewpoints, showing that examining shifts in
employment and output do not properly reveal the rise of financial income within “real economy” firms.
12
This is the use of corporate cash in the financial sector, loaning it out as commercial paper to earn a return.
Lin (2015) shows how firms shifted into holding a rising proportion of financial assets.13
Specifically, in the 1980s and 1990s, ownership of financial assets varied with the business
cycle, but since the 2000s there has been a steady rise of such ownership (Lin 2017). This
ownership is highly concentrated in large firms: Just 30 U.S. companies have amassed
holdings of more than $1.2 trillion worth of cash, securities, and financial investments.
Roughly 70 percent is held overseas—crucially, financial investment can be conducted
without bringing the profit “home” to the U.S., whereas productive investments require
such repatriation and payment of U.S. corporate taxes.14
Krippner (2012) posits that rising financial asset-holding was initially driven in the high
interest rate environment of the 1980s, when it was a bad time to be a borrower and a good
time to be a lender. Corporate cash was directed towards higher-yield short-term financial
assets rather than borrowing for investment purposes at extraordinarily high interest rates.
The push to increase short-term returns rose with the threat of takeovers, driven by newly
emboldened activist investors. In the current era, as interest rates have stayed historically low,
for large firms at least, financial asset-ownership may still provide a higher return in the short-
term than putting corporate cash to work where the gains require a long-term focus. The
challenge is to reorient public policy, so that it rewards investment in long-term, sustainable
productivity, rather than incentivizing short-term gains from financial asset-holding.
13
Financial assets can range from in-house credit cards to commercial paper and riskier assets.
14
See Financial Times, “U.S. Companies Transformed into 800lb Gorilla in Bond Market,” September 12, 2017.
15
A review of the literature documenting this rise is beyond the scope of this paper; see, for example, Lazonick (2014); G.
Davis (2015); Epstein 2015; Parenteau (2005); Appelbaum and Batt (2014); and Dallas (2012).
This rise in shareholder primacy can be seen most directly from the exponential growth
in stock buybacks, in which public corporations buy back shares of their own stock on the
open market, increasing their share price (as fewer shares remain) without improving
their product or finding new customers (Lazonick 2014). This has the direct consequence
of reducing the earnings that are retained within the firm. Before the 1970s, American
corporations paid out 50 percent of profits to shareholders and retained the rest for
investment. Now, shareholder payments are 90 percent of reported profits (Lazonick 2014).
Buybacks are a speculative mechanism that do not provide new productive capital to firms;
instead, they raise share prices directly, rewarding the selling of stock. From 2006 to 2015,
the firms that make up the S&P 500 spent 54 percent of net income on buybacks ($3.9
trillion). This has the direct effect of benefitting shareholders who can sell stock at higher
prices and the corporate executives whose pay is largely stock-based. This activity is largely
confined to the largest American firms, and examples from among America’s top name
brands abound. Investigating McDonald’s, Lazonick, Hopkins, and Jacobson (2015) show
how the iconic American firm expended $29.4 billion on buybacks from 2005-2014, which
equated to 67 percent of net income. McDonald’s, like many firms, conducts buybacks even
when the stock price is relatively high, which is a further waste of corporate cash. In 2017,
Walmart announced a new $20 billion stock buyback program, following years of billion-
dollar buyback investments, even as its stock was up 17 percent last year.
In the words of Lazonick (2014), “retained earnings are what allow firms to invest in both
[research and development (R&D)] and returning gains to their employees, and exemplify
how an ‘innovative’ firm operates. If retained earnings are reduced due to higher payouts
to shareholders, less is left for innovation and employees.” The following sections will
document the impact of corporate financialization on employees and productive investment.
Several authors look at the correlation between rising buybacks and declining wages,
showing that corporate funds going to buybacks could be redeployed to rising wages
(Lazonick 2015; Ruetschlin 2014). The scale is startling: As Ruetschlin shows, rather than
spending $6.6 billion on stock buybacks in 2013, Walmart could have raised the wages of
its 825,000 frontline employees by $5.13 per hour if it had chosen to invest in its workers.
Lazonick (2015) shows that while McDonald’s conducted the buyback program described
above, McDonald’s pays the 90,000 U.S. workers that it employs directly one dollar over the
legal minimum wage, bringing the average wage to $9.90 per hour.
Lin & Tomaskovic-Devey (2013) investigate the impact of rising corporate financialization
and income inequality, finding that increased earnings from financial activity is associated
with a falling labor share, increased compensation of top executives, and increased earnings
dispersion among workers. They find that:
“The financialization of the U.S. economy restructured social relations and income
dynamics in the rest of the economy. We believe that firms’ increasing reliance on
financial, rather than production, income decoupled the generation of surplus from
production and sales, strengthening owners’ and elite workers’ negotiating power
against other workers. The result was an incremental exclusion of the general workforce
from revenue-generating and compensation-setting processes” (p. 1).
Notably, their research finds that financialization had a comparable impact on labor
outcomes with the more common explanations for increased income inequality,
including declining rates of unionization, globalization, technological change, and capital
investment. Their study also conducted a counterfactual analysis, fixing the level of
corporate financialization at what it was in 1970, and examining the difference between
the observed and counterfactual trend. The contrast shows that financialization accounted
for approximately 58 percent of the decline in labor’s share between 1970 and 2008. The
counterfactual showed a lesser but still positive impact on the growth of officers’ share of
compensation (9.6 percent) and 10.2 percent of the growth in earnings dispersion between
1970 and 2008.
Dunhaupt (2013) also examines the effect of both strands of corporate financialization
on labor’s share of income, measuring the “distributional conflict” between firms and
shareholders on the one hand and wage and salary earners on the other. She uses net
interest and dividend payments as a share of the capital stock of the business sector as the
proxy for financialization, and finds a positive relationship between the increase of such
payments and the decline of the share of wages in national income. Rising shareholder
value orientation is measured as increased net interest and net dividend payments as a
share of the capital stock of the business sector. She examines results for 13 countries from
1986 to 2007, and finds that the share of retained profits declined along with the labor
share, while dividend and interest payments were rising—pointing to increased corporate
financialization as a causal factor of the decline of the labor share. In subsequent work
(Dunhaupt 2014), she ties increasing shareholder value orientation to wage dispersion, due
to rising executive compensation.
16
Steinbaum and Harris Bernstein (2018) define market power as the ability to skew market outcomes in a participant’s own
interest without creating shared value or serving the public good.
Mason (2015) also provides evidence of the break in the link between corporate cash flow
and borrowing and productive investment, showing that since the 1980s, firms largely
borrow to enrich their investors in the short-run.17 This phenomenon reached its zenith
in mid-2007, just before the financial crisis, when aggregate payouts actually exceeded
aggregate investment. Mason shows a dramatic shift over time: In the 1960s and 70s,
an additional dollar of earning or borrowing was associated with a 40-cent increase in
investment. This ratio has been less than 10 cents of each borrowed dollar since the 1980s.
At the same time, shareholder payouts nearly doubled. Mason shows that the net flow of
funds from financial markets to the corporate sector did not shift before and after the Great
Recession, and that the decline in investment cannot be explained by tightening credit
conditions. As he explains, “finance is no longer an instrument for getting money into
productive businesses, but instead for getting money out of them” (p. 3).
17
Mason’s work also points to the macroeconomic challenge that lower interest rates are not leading to increasing
corporate investment because of the fundamental break in the chain.
Davis posits that it is critical to examine the purpose of increased financial profits in order
to more fully understand the impact on fixed investment. Investment decisions rely on the
value of fixed investment as well as the decisions of how to finance it; both have shifted in
the last several decades due to new norms of corporate governance and rising firm-level
volatility. She finds that rising shareholder value maximization is associated with declining
fixed investment in large firms as the pressure of short-termism drives reallocation. For
the largest firms, a one standard deviation increase in average industry-level repurchases
is associated with a .14 standard deviation decline in investment. In contrast, she finds that
“the stock of financial assets is found to have a positive and robust relationship to fixed
investment in both the short-term and the long-run in most specifications” (p. 19). This is
consistent with her explanation that “for given expected returns, firms hold both fixed and
financial assets, and investment actually increases if the stock of financial assets rises above
the desired level.” Especially for large firms, the financial profit rate is positively correlated
18
Fixed investment refers to investment in physical capital and/or assets and technology (in contrast to investments in labor
and financial assets).
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